A Beginner’s Guide To Equity Linked Savings Scheme

Posted by Raghav Mehera on May 22nd, 2019

Equity linked savings scheme is the most convenient and preferred tax-saving instrument among others. It is a kind of equity mutual fund where a substantial amount of its assets is invested in equity and equity-related instruments such as a share certificate.

ELSS funds are entitled to long term capital gains tax however gains up to 1 Lakh per annum are exempted from LGT.

ELSS funds also have tax exemption up to ₹1.5 Lakh per annum under section 80C of the Income Tax Act.

Equity linked savings scheme have both dividend and growth options.

Regular dividends are distributed to the investors whenever dividend is declared by the company in case of dividend scheme, even during the lock-in period; whilst in the growth scheme, the investors receive a lump sum at the end of three years. 

You must always look into the long-term performance of the fund along with the volatility of the fund in the past. The other factors which needs to be looked according to the fund manager investment approach is the portfolio of the investment and the expense ratio of the funds.

So, what are the advantages of Equity linked savings scheme?

1. Equity linked savings scheme has a relatively lower lock-in period than the traditional tax saving instruments such as Provident funds, bank fixed deposits and national savings certificates.
2. As the ELSS invests in the equity market, the returns are comparatively better in equity markets
3. Since Equity linked savings scheme has one of the lowest lock-in periods as compared to Provident Funds (15 years), NSC investments (6 years), Bank Fixed Deposits (5 years), it is more able to be liquidated.

However, Equity linked savings scheme also has certain limitations such as:-

1. Pre-mature withdrawals are not allowed for equity linked savings scheme unlike that for provident funds and bank deposits
2. ELSS is not for risk averse investors as the risk is linked with the market risk and volatility so only if you’re ready to take the risk, ELSS is helpful.
3. Risks linked with equity investments affect equity linked savings scheme.

The success of Equity Linked Savings Scheme depends upon the performance of the stock markets. If the investor can take on high risk, ELSS is an option. The investor may also switch to other investment avenues like debt if he gets better tax adjusted returns from another source like debt market, also since the risk is lower.

The success of Equity Linked Savings Scheme depends upon the tax treatment it receives under the Direct Tax Code, so ensure that you are aware of all the relevant policies to make an informed decision.